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The SEC recently charged a Manhattan-based private equity manager and his firm with stealing $9 million from investors in their private equity fund. The SEC complaint claims that Lawrence E. Penn III (Penn) and a longtime acquaintance developed a sham due diligence arrangement whereby Penn used fund assets to pay fake fees to a company controlled by his acquaintance. However, instead of conducting any due diligence with respect to potential investments, the company used the fees to kick money back to companies and accounts controlled by Penn for other purposes. The SEC further alleged that Penn paid significant commission to third parties to secure investments from pension funds and rented luxury office space to project the image that his firm, Camelot Acquisitions Secondary Opportunities Management (Camelot) was a thriving international private equity operation.

According to the SEC’s complaint, Penn stole approximately $9.3 million of investor assets and repeatedly misled Camelot’s auditors about the nature and purpose of the due diligence fees. When Camelot’s auditors increasingly questioned the arrangement about the fees and in an effort to cover their tracks, Penn also lied to the auditors and forged documents to prove the fees were valid.

The SEC’s complaint charges Penn, Camelot and other associated persons and entities with violating the antifraud, books and records, and registration application process of securities laws. The SEC was able to obtain an emergency court order to freeze the assets of Penn and Camelot, as well as the other individuals and entities involved in the sham arrangement. The complaint seeks a final judgment that would require the guilty parties to disgorge ill-received gains with interest, pay financial penalties and be barred from future violations of the antifraud provisions of securities laws. The SEC’s complain is available here.